Lee McDowell, head of Business Development, Psigma Investment Management, looks at how paraplanners can get greater clarity on DFM costs and charges.
Paraplanners have become indispensable to many financial adviser firms today. They provide vital skills and support in many areas including accounting, administration, reporting, and, increasingly, in selecting a range of third-party managed portfolios and a panel of Discretionary Fund Managers (DFMs) for financial advisers, so they don’t have to run model portfolios in-house.
But selecting the right DFMs can be a particularly challenging area for paraplanners – particularly as it is often hard to understand the different models of costs and charges some DFMs provide. This in turn can make it challenging to give clients a complete overview of their costs, charges and performance.
On 3 January 2018, regulations regarding costs and charges disclosures – MiFID II – came into effect. Since then, firms have had to meet strengthened requirements on disclosing information about costs and charges. While there has been a drive to ensure transparency over the total costs borne by a client, there has been a myriad of interpretations of the guidance as to what needs to be fully presented at outset.
To add to this confusion, how costs and charges are displayed on client-facing material may not necessarily be consistent across DFMs. This lack of consistency has made it difficult for paraplanners to easily break down the costs associated with different portfolios from different providers on a like-for-like basis.
What are the charges?
- All DFMs will have an Annual Management Charge which is a fee levied for their portion of the management of an investment portfolio.
- Within a portfolio there are underlying costs associated with holding investments. These are Ongoing Charges Figures (OCF) and Products Costs, which are fees paid on the investment holdings within a portfolio.
- Other costs associated with investing include the Custody, Settlement and Execution costs, which are fees paid for holding and exchanging assets.
- Finally, clients are charged Transaction Costs. This is a key fee highlighted by the changes to the new regulations which state that Transaction Costs must be reported correctly as they make up a percentage of the OCF. The two key elements of Transaction Costs include Explicit Costs (broker commissions, taxes, and levies) and Implicit Costs (the difference between the order price and the execution price).
Navigatus, a small firm of professional paraplanners based in Salisbury, is one firm that has found getting to grips with the costs and charges presented by DFMs challenging. Company founder and chief paraplanner, Aleksandra Sasin, explained: “Financial advisers rely on us to disclose all the costs and charges that DFMs present to us so that they can make the best decision on who to work with. However, it just isn’t a case of comparing apples with apples; often it is a complete minefield in terms of the different approaches that firms take
“Having greater clarity and transparency over costs and charges was a clear goal of MiFID II, but there are often discrepancies over how the guidance is being interpreted, and how costs and charges are presented. This can make it harder to work out the total portfolio management fees. Because of this, we train all our paraplanners to really scrutinise charges, and check that everything has been clearly costed out. Some DFMs are presenting their Transaction Costs separately, which leaves the Ongoing Charge Figures amounts looking lower than their true value to the untrained eye. But our experience tells us that, if first-glance figures look too good to be true, they usually are.”
Aleksandra and some of our other clients had spoken to us at Psigma about the need for a standardised way of checking the costs and charges being disclosed, and we came up with a solution. We have put together some simple questions for paraplanners to ask to see if there is any disparity in the transparency of costs and charges presented by DFMs. These are our five key questions:
- Is VAT applied to the AMC?
- Are Custody Settlement and Execution charges disclosed?
- Are Transaction Costs included in the OCF and reported accordingly?
- Are Transaction Costs inclusive of both explicit and implicit fees?
- Is Performance reported net of all fees, including AMC?
We are big advocates of transparency, and so on top of these questions we have also created a ‘clear charges’ checklist, so that paraplanners like Navigatus can easily compare DFMs when doing their research. If their chosen DFM cannot or will not disclose this level of detail, then there may be additional fees that a client will have to pay.
Aleksandra has told us that our checklist has made a huge difference to her firm, particularly as they have recently recruited more junior team members who use the template to guide their research. It is saving them a huge amount of time and resources, and ensuring that they can provide complete transparency over DFM costs and charges. This enables them to present their client reports with complete confidence.
This article was first published in the November 2021 issue of Professional Paraplanner.
